South Street Theatre Co., Inc. v. McGowan Builders

On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1577-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted June 2, 2008

Before Judges Graves and Alvarez.

Defendant McGowan Builders, Inc. (McGowan), appeals from an order dated August 7, 2007, which permanently enjoined arbitration of McGowan's claims against plaintiff South Street Theatre Company, Inc. (the Theatre). On appeal, McGowan alleges the trial court improperly construed the parties' construction contract when it held the contract did not provide for arbitration as the exclusive means of dispute resolution. We affirm.

On January 3, 2006, McGowan and the Theatre entered into a construction contract (the Contract) for expansion of the Theatre's building located at 100 South Street in Morristown. Under the terms of the Contract, which was drafted by McGowan, McGowan was to be the general contractor on a project for improvements to the Theatre. Construction was to begin on April 3, 2006, and "substantial completion" was to be achieved by November 1, 2006. In exchange for its services, the Theatre was to pay McGowan $5,525,667. Paragraph 15 of the Contract provided as follows:

a. GENERAL PROVISIONS APPLICABLE TO ALL CLAIMS. Claims by the Contractor against the Community Theater shall be subject to the New Jersey Contractual Liability Act, N.J.S.A. 59:13-1, et seq. including the notice and time for suit provisions. . . . All claims shall also be subject to the terms of this contract including the general conditions, and the Contractor may not assert any claims for extra costs unless it maintains all the records of its estimated and actual costs as required by paragraph 9 and the general conditions. The Contractor also agrees that suits against the Community Theater must be pursued in the county where the project is located.

[(Emphasis added).]

The Contract also incorporated by reference "General Conditions of the Contract for Construction, AIA [American Institute of Architects] Document A201-1997" (the General Conditions). These General Conditions, which are promulgated by the AIA, were included in a two-volume Project Manual the Theatre issued to all bidding parties, including McGowan. Of relevance to this dispute are Paragraphs 4.4 through 4.6 of the General Conditions. According to Paragraph 4.4.1,

[c]laims, including those alleging an error or omission by the Architect but excluding those arising under Paragraphs 10.3 through 10.5, shall be referred initially to the Architect for [a] decision. An initial decision by the Architect shall be required as a condition precedent to mediation, arbitration or litigation of all Claims between the Contractor and Owner arising prior to the date final payment is due, unless 30 days have passed after the Claim has been referred to the Architect with no decision having been rendered by the Architect.

[(Emphasis added).]

Paragraph 4.5, entitled Mediation, states in part: "Any Claim arising out of or related to the Contract . . . shall, after initial decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party."

Additionally, the pertinent part of Paragraph 4.6, entitled Arbitration, reads as follows:

4.6.1 Any claim arising out of or related to the Contract . . . shall, after decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of Paragraph 4.5.

4.6.2 Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [(AAA)] currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the [AAA].

[(Emphasis added).]

Thus, the General Conditions anticipated a three-step process: first, claims were to be submitted to the Architect, then to a mediator, then to arbitration. Nevertheless, it is not clear from the record whether McGowan pursued these first two steps before filing for arbitration.

In addition to the General Conditions, a "Rider to Construction Contract Between McGowan Builders, Inc. and Morristown Community Theatre" (the Rider) was drafted by the Theatre, signed by both parties, and appended to the Contract. For purposes of this appeal, the relevant portion of the Rider is Paragraph 8, which reads as follows:

8. DEFAULT AND TERMINATION.

A. In the case of default on the part of the Contractor [McGowan] under the terms of this Contract, the materials and equipment of the Contractor shall, at the option of Community Theatre, be left on the job site for the use of the Community Theatre in completing the Work covered by the terms of this Contract. If the Contractor fails or neglects to carry out the Work in accordance with the Contract or otherwise to perform in accordance with this Contract and fails, within three (3) days after receipt of written notice, to commence and continue correction of such default or neglect with diligence and promptness, the Community Theatre may, after five (5) days following receipt by the Contractor of an additional written notice and without prejudice to any other remedy Community Theatre may have, terminate this Contract and finish the Work by whatever method it may deem expedient. If the expense of finishing the Work exceeds the unpaid balance of the Contract amount, the Contractor shall, upon notice, pay the difference to the Community Theatre.

C. In the event that either party is required to bring an action in a Court of competent jurisdiction or in any other alternate dispute resolution forum to enforce any provision of this Contract or to recover damages by reason of the failure of the Contractor to perform the covenants, terms, and provisions hereof, either party shall be entitled to recover in addition to all other sums, litigation costs, reasonable attorney's fees and other related costs.

[(First and third emphasis added).]

According to plaintiff, "[n]umerous issues arose during construction relating to McGowan's performance," and McGowan failed to achieve "substantial completion" by November 1, 2006. On December 4, 2006, the Theatre terminated the Contract, alleging McGowan defaulted on its performance obligations. On February 7, 2007, McGowan filed a "Demand for Arbitration" with the AAA, seeking approximately $750,000 in damages resulting from the Theatre's termination of the Contract. The Theatre objected to arbitration and filed a "Verified Complaint Seeking Stay of Arbitration" on June 8, 2007. See N.J.S.A. 2A:23B-6(b) ("The court shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate."). See also Muhammad v. County Bank of Rehoboth Beach, Delaware, 189 N.J. 1, 12 (2006) (noting the existence of a valid arbitration agreement is a gateway question that requires judicial resolution) (quotation omitted), cert. denied, ___ U.S. ___, 127 S.Ct. 2032, 167 L.Ed. 2d 763 (2007).

On June 20, 2007, the trial court entered an order requiring McGowan to show cause on August 3, 2007, "why a judgment should not be entered ordering a permanent stay of arbitration pending with AAA, and granting such other relief as the [c]court deems equitable and just." In its answer to plaintiff's complaint, McGowan acknowledged the Theatre terminated the Contract "on or about December 4, 2006," but McGowan disputed that the "termination was justified and proper." McGowan also claimed that "plaintiff's request for an order permanently enjoining the pending arbitration should be denied [because] the parties' agreement contains a binding arbitration clause."

During the hearing on August 3, 2007, McGowan's attorney argued that the parties had agreed to use arbitration as the exclusive remedy for resolving their disputes. However, the court found the parties had not clearly agreed that arbitration would be the sole remedy available for resolving disputes between them. The court's oral decision on August 3, 2007, includes the following:

Paragraph 8 [of the rider] comes into play here because this is exactly what happened. Plaintiff declares a default and terminates the contract because of their claim of inability to complete the project in accordance with the contract by the November 1, 2006, date. So Paragraph 8A indicates that in case of default on the part of the contractor or if the contractor fails and neglects to carry out the work in accordance with the contract or otherwise to perform in accordance with the contract and fails within three days after receipt of notice to commence and continue correction of the default or neglect, the Community Theatre may after five days following receipt by the contractor of an additional written notice and without prejudice to any other remedy the Theatre may have terminate the contract.

So, first, the parties agree that in Paragraph 8A, if the contract is terminated which is what the plaintiff has alleged here occurred that they then have the ability after this default or neglect, this is what they claim, and notice to the contractor that they may terminate it. And Paragraph 8A clearly says and it's without prejudice to any other remedy that they may have. That's number one.

And then in Paragraph 8C . . . . it clearly says in the event that either party is required to bring an action in a court of competent jurisdiction or in any other alternate dispute resolution forum to enforce any provision of the contract or to recover damages by reason of the failure of the contractor to perform, either party shall be entitled to recover in addition to all other sums litigation costs, reasonable attorney's fees, and other related costs.

So clearly Paragraph 8 which is really the substantive paragraph here is implying that there is not an exclusive remedy for arbitration, that you can proceed -- first they have -- they can pursue any remedy they want in Paragraph 8A, and then in Paragraph 8C, they have . . . an either/or proposition of a court or any other alternate dispute resolution forum in that regard.

So when I look at that rider -- and don't forget the rider is signed by the parties. It's not an incorporated document like the general conditions in that regard. It's language that the parties developed themselves in this respect not incorporating other language. It's clear on its face that that doesn't provide for an exclusive remedy.

The general conditions here do not have any exclusive language. It just says it's subject to arbitration. It doesn't say anything about the fact that this is the sole remedy. It doesn't say anything about the fact that you're waiving your right to bring a suit in a court of law or waiving your right to a jury. It simply indicates that -- it's titled arbitration and then indicates that it's subject to arbitration.

So if that was all [there] was, . . . I would be saying it should go to arbitration. But that's not all there was. We have Paragraph 8 of the rider which is really the controlling paragraph here as to . . . where the parties find themselves, and it's the language of Paragraph 8 that controls.

Moreover, "[i]n the absence of a consensual understanding, neither party is entitled to force the other to arbitrate their dispute." In re Arbitration Between Grover & Universal Underwriters Ins. Co., 80 N.J. 221, 228 (1979). In this case, based primarily on the language in Paragraph 15(a) of the Contract and Paragraph 8 of the Rider, the court concluded that the parties had not elected arbitration as their sole or excessive remedy for resolving their disputes, and the record supports that determination. In Paragraph 15(a) of the Contract, McGowan agreed "that suits against the Community Theater [sic] must be pursued in the county where the project is located." (Emphasis added). Black's Law Dictionary defines a "suit" as "[a]ny proceeding by a party or parties against another in a court of law." Black's Law Dictionary 1448 (7th ed. 1999) (emphasis added). Of course, it would have been unnecessary for the Contract to address an appropriate venue to file suit, if the parties agreed that arbitration was the exclusive method for resolution of their disputes. Similarly, there would have been no need for Paragraph 8C of the Rider to address litigation costs in the event of a lawsuit if arbitration was to be the sole remedy available for resolving disputes. Moreover, as the court noted, unlike the General Conditions, the Contract and the Rider were specifically drafted and signed by the parties.

An agreement waiving the right to resolve disputes in a judicial forum must "clearly state its purpose" so that both "parties know that in electing arbitration as the exclusive remedy, they are waiving their" right to pursue recourse in a court of law. Marchak, supra, 134 N.J. at 282. In this case, however, the arbitration agreement is contained in a generic document, which was not drafted or signed by the parties; it conflicts with and is undermined by the Contract and the Rider, which were drafted and signed by the parties; and the Contract, the Rider, and the General Conditions, taken as a whole, do not demonstrate that the parties explicitly agreed upon arbitration as their sole remedy. We therefore affirm substantially for the reasons expressed by Judge Bozonelis in his well-reasoned oral decision on August 3, 2007.

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